Company valuation: Melia Hotels International...They also acquired the hotel chain Melia (1987)...
Transcript of Company valuation: Melia Hotels International...They also acquired the hotel chain Melia (1987)...
COLEGIO UNIVERSITARIO DE ESTUDIOS FINANCIEROS
GRADO EN
ADMINISTRACIÓN Y DIRECCIÓN DE EMPRESAS
Trabajo de Fin de GRADO
Company Valuation: Melia Hotels
International
Author: Carbonell Velasco, Alejandra
Tutor: Álvarez Plaza, José Jaime
Madrid, April 2020
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INDEX
1. INTRODUCTION ...................................................................................................... 2
2. MELIA HOTELS INTERNATIONAL ....................................................................... 3
2.1. HISTORY OF MELIA ........................................................................................ 3
2.2. MELIA’S BUSINESS MODEL ............................................................................ 4
2.3. RISKS AND OPPORTUNITIES ......................................................................... 6
3. SECTOR ANALYSIS ................................................................................................. 8
4. VALUATION METHOD: DISCOUNTED CASH FLOWS ...................................... 10
4.1. FREE CASH FLOW (FCF) ............................................................................... 11
4.2. PROJECTION PERIOD: TIME HORIZON ..................................................... 12
4.3. PROJECTION PERIOD: FREE CASH FLOWS .............................................. 13
4.4. ESTIMATION OF THE DISCOUNT RATE ..................................................... 18
4.4.1. Calculation of the discount rate in the discounted cash flow method: WACC
(Weight Average Cost of Capital) ............................................................................. 18
4.4.2. Cost of Debt (Kd) ........................................................................................ 19
4.4.3. Cost of Equity (Ke) ..................................................................................... 20
4.4.4. Capital structure ........................................................................................ 27
4.4.5. Calculation of WACC................................................................................. 28
4.5. TERMINAL VALUE......................................................................................... 28
4.6. RESULT OF THE VALUATION OF MELIA HOTELS INTERNATIONAL
USING THE DCF MODEL .......................................................................................... 30
4.7. SENSITIVITIES ................................................................................................ 31
5. VALUATION METHOD: TRADING MULTIPLES ................................................ 32
6. CONCLUSION ......................................................................................................... 36
7. TABLE INDEX......................................................................................................... 37
8. REFERENCES ......................................................................................................... 38
9. APPENDIX ............................................................................................................... 42
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1. INTRODUCTION
Nowadays, companies face several situations in which they find necessary to determine
the intrinsic value of a company, that is, the objective estimation of the current and
potential value of the enterprise and not the price or the market value that a business may
have; aimed at finding information that allows rational decisions to be made.
The valuation of companies is considered by many an art more than a science due to the
degree of subjectivity that flows from the person who performs the valuation, as the vital
complexity that characterizes any company leads to the difficulty of establishing a
financial formula to value it.
For a correct valuation of a company, it is very relevant to make a contextualization of
the macroeconomic environment, the sector in which the company operates as well as
other external and internal variables which will allow us to reach to more precise
conclusions in order to support our valuation.
There are different valuation methods and not all of them give the same value, being
advisable to determine which method best suits in each case. Among the most widely
used methods, we can find the patrimonial methods and the methods based on
profitability, which are based on the business’s ability to create wealth, which implies
taking into account a component of uncertainty and an additional complexity.
Within the methods based on profitability, we find the discounted cash flow method,
considered as a method of correct application in the case of a company with a long
maturity period.
Based on the hypothesis of the operational continuity principle, we are going to estimate
an interval for the value of Melia Hotels International, by using the Discounted Cash
Flow Model as the main tool as well as the comparable multiples method, by making
assumptions and arguments about the evolution of the company which will be developed
throughout the project.
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2. MELIA HOTELS INTERNATIONAL
2.1. HISTORY OF MELIA
Melia Hotels International is one of the leading companies in the hospitality industry,
situating itself among the top twenty hotel companies at an international level. Currently
operating 326 hotels and 83,778 rooms in 44 different countries, from which 48% are
resort hotels and 52% urban, furnishing them with a competitive advantage against
possible crisis among the different segments of demand. (Melia Hoteles, 2020)
The history of Melia Hotels International starts in 1956 when Gabriel Escarrer founded
the company in Mallorca, Spain. Since then, they have emphasized on three main
concepts: vision, family and passion. The vision of the founder, backed by a family with
strong values that support a responsible company and the passion for service, and for
offering the customer the best hotel experiences. (Melia Hoteles, 2015)
During the 1960’s they developed their business in the Balearic island Mallorca by
establishing different assets.
In the 1980’s they developed their business in the main Spanish cities through the
acquisition of the hotel chain HOTASA (1984) becoming the largest hotel group in Spain.
They also acquired the hotel chain Melia (1987) changing the company name to Sol
Melia. At the same time, they opened their first international hotels in Bali and Egypt.
In 1994 they launched the Melia loyalty program, currently known as “Melia rewards”.
In 1995 they opened Paradisus Resorts specialising in the luxury sector among the
hospitality industry.
Melia hotels was the first hotel company to go public (1996), a step that represented a
reinforcement in demand for transparency, control and social responsibility.
Additionally, in 1997 they launched the booking website Melia.com.
Between the 1999 and the early 2000’s, Melia hotels characterised itself by gaining
presence in the European gateway cities London, Milan and Paris through the acquisition
of the hotel chain TRYP (2000), the launch of holiday club (2004), ME by Melia (2006)
and the acquisition of the German brand INNSIDE (2007).
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From 2010 onwards they have continued developing and gaining presence in different
parts of the world were New York, Miami, the Caribbean and the East region could be
highlighted.
In 2011, the company that had been decades operated by the name Sol Melia embarked
on a new journey under the brand that represents its present and its future: Melia Hotels
International.
At the moment, as mention before, it operates in 44 different countries and expects to
continue expanding its business to many other countries around the world. At the same
time, they are adapting to the new trends by digitalizing their model, a step that started in
2014 with the Melia Digital Project, made to transform client relations, strengthening
their management model value proposal and which continues to improve in order to
optimise processes, their capacity to generate revenue and personalise their customers’
experiences. Furthermore, they have also been able to consolidate with social media given
the evident influence it has on business reputation and performance through two main
instruments, amplify and #AskCEOMelia.
2.2. MELIA’S BUSINESS MODEL
Melia’s strategic vision is aligned in order to be recognised as a world benchmark in
excellence, responsibility and sustainability as well as to bring about the transformation
required by an environment that is increasingly competitive, changing and global,
reinforcing in that manner, their leadership in the leisure segment.
In order to achieve its objective, they have developed five main core strategies:
Excellence in management, successfully differentiating and positioning their different
brands; culture and transformation, strengthening their employer brand image in order to
drive forward the cultural transformation; reputation and recognition, ensuring excellence
and transparency as well as reinforcing the relations with their stakeholders by driving
forward a solid and consistent model of governance; asset strategy, building based on
criteria of sustainability and digitalization and innovation.
Melia Hotels International, operates through four different types of management (owned,
leased, managed and franchise) and under seven different brands (Gran Melia hotels &
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resorts, Paradisus by Melia, ME by Melia, Melia hotels & resorts, Innside by Melia, Sol
by Melia and Tryp by Windham).
The Group’s reputation and experience on the holiday sector is a mix of their seven
brands. Each one having its own distinctive personality and having clearly defined
psychographic and demographic profiles accomplishing the needs of their customers as
well as adapting to changes and new trends by constantly innovating based on ongoing
researches.
Their presence map could therefore be divided by type of management and brands. Going
through their active portfolio, 39% is under management (Melia manages the property of
a third party under one of its brands and fees are charged to Melia for running the hotel);
33% are leased (The hotel is rented and managed by Melia); 14% is property owned
(Hotel is both owned and managed by Melia) and the other 14% are franchises (Hotel
owner operates with a Melia brand and hires their marketing channels). Having a two-
way focus strategy, asset management and selective joint ventures. Carried out with
digitalization and connectivity as their best allies to keep moving forward as leaders.
On the other hand, Melia Hotels International brands could be divided on three different
ranges: Upper scale, which represents the 11% of the business and its operated by Gran
Melia hotels & resorts, Paradisus by Melia and ME by Melia; the upscale which
contributes 47% of the portfolio where Melia hotels & resorts and Innside by Melia
appear and lastly, midscale which represents 37% of the business with Sol by Melia and
Tryp by Windham. The other 5% are consolidated by other hotels managed by Melia.
(Melia Hoteles, 2019)
Furthermore, Melia has transformed their distribution channels towards their own direct
sales channels as well as developing a loyalty program in order to boost system-wide
profitability through: The circle by Melia, an experience-driven program that strives to
personalize every detail to the customers’ expectations (Circle By Melia, 2020); Melia Pro,
a reservations portal for professionals empowering users to manage and control their
professional activity flexibly offering the best guaranteed rate; and through Melia
rewards, used to relate with their customers as well as to their professional segments and
employees being therefore, one of the main pillars of the company.
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Melia Hotels International, has therefore been able to lead the online development of the
sector as well as reinforced their omnichannel presence at both B2C and B2B level,
through Melia.com and Meliapro.com respectively, reaching levels of growth at RevPAR
(Revenue per available room) that surpass their competing international brands.
2.3. RISKS AND OPPORTUNITIES
Melia Hotels International is a leading global presence company aimed at servicing local
needs.
Its activity (measured as % of rooms) is distributed among 7 different areas: EMEA
(15.6%), Spain (16.5%), Mediterranean (30.9%), Brazil (3.6%), Cuba (16.1%), America
(11.3%) and Asia (6.1%). (CNMV, 2019)
Additionally, the operating profit (EBIT) contribution could be divided in: Europe &
Middle East (17%), Spain (38%), Americas (40%), Africa (3%) and Asia (2%).
Based on the information provided above, we could conclude that among the business
risks Melia has, we could clearly find the distribution portfolio, as they have certain
dependence on some regions (Americas and Spain, especially Spain giving its size), but
based on the sector analysis, which is further explained later, this distribution is coherent
to the distribution of tourism. Nevertheless, Melia is working in order to continue
improving this situation through its strategic plan focused, among other things, in
maintaining a balanced portfolio.
On the other hand, as it has a global presence, they are affected by the global economic,
sociocultural, political and legal environment. Which is currently highlighted by: The
deterioration between the relationship of the two great motors of the world (United States
and China), which have had a real effect on the rest of the world among near regions and
countries; the political conflicts in Cataluña; The uncertainty created by BREXIT; and
the “Greta Thunberg effect”, globalized during 2019 which has positioned climate change
as a priority issue both in the public and private sector, with an increasing impact in the
decision making process of companies, governments, investment funds and other key
interest groups for the touristic sector. Not to mention, the recent Covid-19 outbreak
which is generating a global uncertainty and panic which is starting to present the first
signs of deceleration in the economy. However, for this valuation, I am not going to take
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into account the effects of Covid-19, as we don’t have clear information about all the
future effects as there is no data beyond an increase in the discount rate due to the
increased risk perception. . (eldiario.es, 2020)
Among the different risks Melia Hotels International faces, the presence of competitors,
also takes part, hotel chains such as NH Hoteles, Wyndham Worldwide and Milennium
Hotels & Resorts among many others. The touristic sector is constantly evolving and
Melia has to be able to keep up with the changing tendencies as well as being able to take
advantage of the opportunities the sector presents, such as the collaborative growth with
its competitors as previously occurred with TRYP (with Wyndham). Additionally, the
new trends coming from new platforms such as Airbnb, also represents a risk for the
urban hotels of Melia, which represents 52% of its portfolio as mentioned before.
Other risks that could also influence Melia Hotels International, could be:
- The technological advances that among other risks, increase threats from cyber-
attacks.
- Changes in environmental patterns that involve risks such as the increased
frequency of natural disasters or the scarcity of resources.
- Sociodemographic trends such as the aging population and lifestyle changes that
modify consumption patterns and behaviours.
- The risks associated with expansion regarding the choice of country, areas and
partners.
- Exchange rate risks when not financing with the functional currency of the
business
Among the different opportunities of Melia Hotels International we could highlight the
international development and digitalization opportunities.
In addition, Melia Hotels International could encourage the change in the tourism industry
in terms of sustainability, converting the current context and the new demands in an
opportunity, either by reformulating the current offer or creating new sustainable concepts
that reinforce their brands.
Last but not least, it is important to point out that the global maintenance of low interest
rates, could mean a relief for Melia’s financial debt, repaying the debt at a greater speed,
reducing the leverage of the company.
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3. SECTOR ANALYSIS
The hospitality industry is highly dependent and related to the touristic sector. Therefore,
in order to make an overview of how the sector is evolving across the different continents,
we are going to look at the evolution and expectation of tourism.
Table 1. International tourism evolution
(World Tourism Organization, 2019)
As we can see on the graph above, the tourism sector has followed a continued expansion
overtime, despite occasional shock; demonstrating the sector’s resilience and strengths.
The year 2019 has been a turbulent year for the sector, but it still remains as one of the
growth engines of the World economy. Tourism GDP registered a growth of 3.6%,
slightly lower than the 3.9% achieved in 2018. But, the sector remained optimistic about
the future. With a 3% estimated growth in new trips and reaching a volume of 1.6 billion
trips in 2024 according to the World Travel & Tourism Council (WTTC).
It is important to realise that with growth comes responsibility, minimizing the adverse
effect of tourism; prioritizing value to volume and managing tourism in a sustainable
manner. At the same time, adapting to the new trends (innovation, digitalization, societal
changes) in order to remain competitive.
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Within the tourism sector there are different means and purposes of travel, where we can
find: Business, leisure, health and other.
Table 2. Purposes of visit
(World Tourism Organization, 2019)
As mentioned before, Melia Hotels International, has residential as well as holiday hotels
covering the different needs of their current clientele.
On the other hand, as Melia Hotels International operates globally, I find important to
look at tourism expectations across the different continents, in order to see if they are
following an efficient strategy. (World Tourism Organization, 2019)
Europe, the world’s most visited region, had a sustained growth for the ninth year in a
row, with an expected growth of 3% in 2020, where southern Mediterranean destinations
could be highlighted.
Americas, had mixed results across destinations, having a 2% growth in touristic arrivals
(15% share) and 0% growth in terms of tourist receipts (23% share). On the one hand,
North America represents 2/3 of total arrivals, whereas the Caribbean continuous to show
a mixed solid growth.
The Middle East, grew 5% in tourist arrival and 4% in receipts. It is important to mention
that historically tourism was a major pillar only for some regions, but now, some oil-
based economies are also starting to open up for strong tourism development.
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Asia and the Pacific, is the fastest growing region having up to a 7% growth in both tourist
arrivals and receipts, as a result of a growing purchasing power and the increased air
connectivity which have boost travels within and outside the region.
Lastly, Africa is characterised by a robust performance with a 7% growth in tourist
arrivals but just a 2% in receipts.
Based on the graph above, we can now understand why Melia Hotels International
operating profit comes mainly from Europe and Americas and explains why they are
planning to expand towards the Asian region as mentioned in their annual report, having
20 hotels in its pipeline (32%) in order to consolidate their presence in countries such as
China, Indonesia, Malaysia, Thailand or Vietnam.
4. VALUATION METHOD: DISCOUNTED CASH FLOWS
Every asset has an intrinsic value that can be estimated based on its characteristics in
terms of cash flows, risk and growth. The discounted cash flow valuation, is a tool for
estimating that intrinsic value.
Through this valuation method, the expected value of a company is determined through
the estimation of future cash flows discounted at the adjusted rate in order to reflect the
appropriate risk.
Table 3. Outbound tourism by region
(World Tourism Organization, 2020)
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As I am making the valuation of a company which is mature and has a consolidated
business which is expected to continue generating cash flows in the future. I believe the
discounted cash flow method to be the most accurate one in order to estimate its present
value.
Within the DCF method, there are three different approaches in order to value the same
cash flow. (IEB, 2018)
- Free Cash Flow – Represents the firm’s cash flow as if it was entirely financed by
equity, isolating the tax effects of the financing.
- Capital Cash Flow – Represents the cash flows that investors receive, computed
by the dividends paid to shareholders, the change in debt and the interest paid to
bondholders.
- Equity Cash Flow – Represents the company’s residual cash flows after tax and
interest have been paid.
For this valuation, I have decided to use the Free Cash Flow (FCF) method in order to
obtain the present value of Melia Hotels International.
4.1. FREE CASH FLOW (FCF)
The Free Cash Flow (from now onwards, FCF) means how much after-tax cash flow the
company generates on a recurring basis after taking into account non-cash expenses,
change in working capital and the required capital expenditures (Capex).
The reason of using the FCF in the DCF Method for Melia Hotels International valuation,
is because it closely corresponds to the actual cash flow that an investor would receive
each year if they decided to buy the entire company.
Therefore, in order to obtain the free cash flow, we forget about the financing in order to
focus on the economic performance of the company’s assets after taxes, seen from a
perspective of an ongoing business and taking into account in each period the necessary
investments for the business continuity.
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In order to calculate the FCF we are going to use the following scheme:
(+) Earnings before Interest and Taxes (EBIT)
(-) Taxes
Net Operating Profit after Taxes (NOPAT)
(+) Amortization/Depreciation
(+) Provisions
(+) Deferred Taxes
Operating Cash Flow
(+/-) Capital Expenditure (Capex)
(+/-) Change in Working Capital
(+/-) Free Cash Flow
4.2. PROJECTION PERIOD: TIME HORIZON
In order to develop the valuation of Melia Hotels International through this method, it is
necessary to decide the time horizon that we are going to consider in our analysis,
meaning, the number of years for which we are going to project the future free cash flows.
Theoretically, we should estimate an unlimited stream of cash flows, and therefore, an
infinite time horizon since we assume that all companies have a vocation for permanence
as a business, having therefore, an indefinite duration in time. (Yirepa, 2020)
However, we know that it is impossible to make an adequate forecast of an infinite period.
Therefore, we divide the projections into two periods as an alternative:
Firstly, a period of time normally between 3 to 5 years in which due to its proximity in
time to the current moment, facilitates a detailed calculation of cash flows, since there is
sufficient information with high degree of reliability in order to make individual
projections. (Fernández, Pablo)
For Melia Hotels International, I have decided to choose a time horizon of five years for
the detailed projections, as it is a consolidated business which is great positioned in a
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mature market as the hospitality industry is. Additionally, the operational data does not
have large fluctuations in time and the growth obtained over the last years has been very
similar.
Secondly, as mentioned earlier, we assume that the company tends to infinity, therefore,
the second period begins at the end of the first period, and it consists of the calculation of
a terminal value through a perpetuity, applying a constant growth rate to the last estimated
cash flow in order to capture the value at the end of the period. (Damodaran, 2020)
4.3. PROJECTION PERIOD: FREE CASH FLOWS
In order to develop the projections for Melia, I will first start with a brief conceptual
framework in order to understand several of the assumptions made.
As previously mentioned, most of Melias’ hotels are under management, having
therefore, many leasing agreements; which explains why I have considered relevant to
explain more in depth what the IFRS 16 means.
On January 1, 2019, the new IFRS16 lease regulation came into force, which entails
significant changes in the composition of assets and liabilities and in the structure of the
consolidated income statement, as well as in the cash flow statement.
IFRS16 introduces new requirements in relation to the accounting for leases and
significant changes in it, eliminating the distinction between operating and financial
leases, requiring the recognition of a right of use and a lease liability on the
commencement date of all leases (with exception of those which are less than one year
and under low value of the underlying asset).
IFRS 16 will increase the enterprise value of Melia as net debt will increase, while equity
value should remain the same. In the DCF Model, in which enterprise values are assessed
based on the NPV of expected FCF, this will generally be reflected via the following two
effects: (Deloitte, 2019)
- Following IFRS16 leverage ratios of (peer group) companies which are used to
estimate the target capital structure in the WACC, will increase. A higher
leverage, with unchanged observed levered betas will lead to a lower WACC and
a high NPV of FCF’s.
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- After IFRS16, the future FCF’s will be higher over the remaining lease period, as
rental expenses are excluded from EBITDA and hence, FCF. The depreciation
charge is a non-cash expense and consequently does not negatively impact FCF.
The lease payments are reflected in the CF Statement via interest payments and
redemptions of the lease obligation, however, these are financing items and also do not
impact FCF.
The increase in the enterprise value should theoretically be exactly offset by the increase
in the net debt (representing the NPV of the remaining lease obligation) of the company
that is being valued. Hence, this would theoretically result in the same equity value.
Once mentioned this, I will now start with Melia’s revenues, which based on its financial
statement, we can say that they have a Compound annual growth rate (CAGR) of 0.89%.
Based on the historical revenues, we can conclude that the magnitude is a fairly
consolidated figure, since there are no great fluctuations between the years, which is
mainly due to the fact that we are in a mature market.
However, in order to carry out an adequate projection of the revenues, I consider
necessary to take into account the expected performance of the touristic sector, as this
company is highly affected by it. As previously mentioned, the touristic sector has
presented sustainable and constant growth rates and it has a positive view of its future
performance. Therefore, we can assume that the sector will keep growing at a similar rate,
nevertheless, in order for Melia to keep expanding at the same rate, they also need to keep
developing their business at the same speed as previous years.
Furthermore, as we are in an increasingly stricter and demanding market, especially when
it comes to the upper scale range, Melia also needs to keep improving its services in order
to keep up with customer needs, and consequently, with the same growth rate.
Gabriel Escarrer, declared that they were going to open 23 new hotels in 2020 maintaining
its international commitment; opening 12 hotels in Europe, 9 in the Asia-Pacific region
and 2 in America; focusing on the vacation and bleisure segment (business with leisure)
and high and premium brands. He also announced that in this way the rate of openings
would be similar to the previous years at an average of one hotel every two weeks.
Moreover, the 90% of this hotels will be under management, in line with the light asset
business model towards which they have turned in recent years. (El Confidencial, 2020)
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Additionally, based on Melia Hotels International annual report, in order to achieve these
objectives, Melia has consider of utmost importance to reinforce their client relationship
in order to consolidate a commercial transformation.
This commercial strategy has been designed to transit from a global perspective to a local
profitability, considering the particularities of each region and destinations where they
operate, allowing the company to generate improvements in the business profitability.
This strategy is mainly given by:
- Enhance a culture of total revenue management: Development of a big data
technology platform to enhance revenue management.
- Positioning in high growth segments: Strengthen regional strategy, focus on
emerging markets and enhancement and development of strategic alliances.
- Maximize the average room rate (ARR) as the main driver in generating income:
Dynamize the price in response to a deep understanding of the behaviour of the
customer and strategic optimization of sales channels.
According to the aforementioned, we could choose the CAGR in order to project the
future revenues. However, given that the company has followed an annual decrease of
3% in the last two years I have considered appropriate to reduce the CAGR by 0,19%
leaving the 0.70% as the adequate percentage in order to project the revenues.
In relation to operational expenses, taking into account that in the last years, the gross
margin on sales has remained almost constant excepting the last year due to the effect of
IFRS16, I have decided to take into account just the percentage of 2019.
With reference to the PPE (Property, Plant and Equipment), based on the announcement
of Gabriel Escarrer about its future openings and the company’s strategy towards the asset
light business model, and in order to be consistent with the revenue growth, I am going
to assume an annual growth of (0.5%), considering it the amount necessary in order to
develop those future operations.
Regarding intangible assets, among which computer application, transfer rights and
industrial property are included, I have considered to establish an annual growth of 1.5%
as they will probably make investments in intangible assets since they have planned to
create a big data application. As well as to improve their omnichannel presence to carry
out their expansion and digitalization strategy,
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On the other hand, regarding the amortization, we can observe a constant historical
evolution except for the year 2019 due to the effects of IFRS16, therefore, I have decided
to use the percentage of the last year (14.2%) making it proportional to revenues.
According to the projection for the corporation tax rate, since there have been many
fluctuations in the recent years, I have considered the best option, to use the theoretical
tax rate of 25%.
Estimation of Net Capital Expenditure (CAPEX)
The capital expenditure is the money used to buy, improve, or extend the life of fixed
assets in an organization, and that has a useful life for one year or more. Such assets
include tangible assets (mainly property, plant and equipment) as well as intangible
assets, essentially, software, patents and licenses. (Tim Koller)
Capital Expenditure can take two forms: (Corporatefinanceinstitute, 2020)
- Maintenance Capex: Refers to the investment that is necessary for the company
to continue operating in its current form.
- Growth Capex: Is the expenditure on new assets that are intended to grow the
company’s productive capacity, unlike maintenance capex, if the company
decided not to proceed with growth capex, the business will still be able to operate
in its current form, though, perhaps below the management’s expectation.
Due to the capex substantial initial costs, irreversibility and long-term effects, capital
expenditure decisions are very critical to an organization. Therefore, budgeting for capital
expenditures ought to be carefully and efficiently planned and executed.
In real life, when it comes to project the future investments, the company gives you their
expenditure plans for the future. However, as we lack of this information we are going to
forecast it.
Many investors, in order to forecast the investment, take it as a percentage of revenues.
Nevertheless, in the case of Melia Hotels International, we are going to assume that the
company is going to carry out investments and disinvestments in the amount that results
from the difference between the net tangible fixed assets (PPE & other fixed assets) and
the projected net intangible assets and the same corresponding to the previous year plus
the adequate depreciation expense.
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Applying therefore, the following formula:
Estimation of the Need of Funds
When it comes to the valuation of a company, it is necessary to look at the investment in
fixed assets (capex) as well as the investment in current assets, which is the effort made
by the company, in financial terms, to develop its corporate purpose which is directly
related to the production process or the provision of services. (Kenton, Invetsopedia, 2019)
In order analyse the variation in the operating need of funds, we need to calculate the net
investment effort of the company in its operating cycle, that is, the short-term investment
for the acquisition of inventories and the customer credit policy. (Quickbooks, 2019)
We are going to calculate it according to the following expression:
+ Change in inventories = + Inventoriesn + Inventoriesn-1
+ Change in clients = + Clientsn + Clientsn-1
+ Change in suppliers = + Suppliersn + Suppliersn-1
= Variation in NOF = + NOFn + NOFn-1
It is important to clarify that as we are looking at the variation, if the current assets
increase this means, Melia has less liquidity and therefore higher needs of funds;
conversely, if current liabilities increase the need of funds of the company will decrease.
Determination of the capital structure
Regarding the projection of the capital of Melia, I have considered appropriate to maintain
the actual amount of equity constant, and with reference to the extra cash made by the
business, it will be used to distribute dividends to their shareholders instead of using them
in order to repay the debt.
This means that most of Melia Hotels International’s earnings will be given to its
shareholders, which in fact, is quite an aggressive consideration, but as it is what Melia
has been doing historically I have consider appropriate to follow the same dividend
CAPEX = Net Value of Fixed assets (n) – Net value of Fixed assets (n-1)
+ Depreciation (n)
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policy, as their shareholders are used to earning that amount of dividends and if we stop
giving them, the market capitalization could crash. Therefore, I have consider realistic to
keep the same strategy.
Moreover, the long-term financial debt has been projected with an annual increase of
1,5%, as mentioned before, the earning will be used to give dividends and therefore the
debt will increase although not dramatically.
On the other hand, I have projected the account “other fixed liabilities” as a constant value
based on the last cash flow due to the instability of historical values and the lack of
information available regarding Melia’s future performance
The current financial debt, has been greatly reduced in recent years. However, in order to
be conservative, I have decided to estimate an annual growth of 2% to maintain this
account in the historical minima without reducing it further, since I consider it unwise.
Additionally, the account “other liquid liabilities” due to the volatility of the historical
values, I have considered appropriate to do it as a percentage of sales, this being a
weighted historical average, as 2019 weights more due to the IFRS16 effect.
4.4. ESTIMATION OF THE DISCOUNT RATE
4.4.1. Calculation of the discount rate in the discounted cash flow method:
WACC (Weight Average Cost of Capital)
The weight average cost of capital is used in financial modelling as the discount rate to
calculate the net present value of a business, and it’s therefore, an integral part of a DCF
Valuation model as well as an important concept to understand in order to obtain the most
accurate value possible. (Santi Alcover, 2009)
The WACC is based on the hypothesis that investors in the capital markets of any sector,
demand returns in accordance with the perceived risk level of their investment; and it
represents the compound cost of capital across all sources including common shares,
preferred shares and debt, weighted by its percentage of total capital, determining the cost
of each part of the company’s capital structure. (Corporatefinanceinstitute, 2020)
Being therefore, a weighted average of two magnitudes: (Pablo Fernández, 2010)
19
- The cost of debt (Kd)
- The required return on shares (Ke)
In order to calculate it, we are going to use the following formula:
Where:
- Ke: Cost of equity (required return on shares that reflect the risk implied)
- E: Equity of the company (market value of the shares)
- D: Debt of the company
- Kd: Cost of debt (market value of debt)
- t: Tax rate
The discount rate is a function of the risk inherent in any business and sector; the degree
of uncertainty relative to the projected cash flows and the capital structure assumed.
The greater the incertitude about the projected cash flow, the higher the appropriate
discount rate will be and the lower the current value of the cash flows.
4.4.2. Cost of Debt (Kd)
The cost of debt is the effective rate that a company pays for the debt that it has in a given
period of time. Basically, the cost that the company will have to bear in order to carry out
its activity through external resources such as loans or credits.
In order to calculate it, we exclude commercial financing such as commercial creditors
or accrued taxes as they don’t carry out cost unless the commercial term is not met.
Therefore, financial debt is the only one considered as part of the external resources,
whose cost is materialized through financial expenses (interests). (Burguillo, 2020)
It is determined as the weight financial expenses, reflected in the income statement,
represented over the average financial debt for the year.
WACC = Ke E
E + D
+ Kd (1 – t) D
E + D
Kd =
Financial Expenses
(Financial debt n-1 + financial debt n)/2
20
However, the fact that financial expenses are deductible in the company’s income tax,
implies a tax shield which has to be reflected in the formula. In order to do so, we multiply
the previous cost by the tax rate.
In this case, we are not going to make the average of the financial debt, as due to the
effects on the IFRS16 the financial debt is completely different from the one of previous
years.
We are going to use the data obtained through Melia Hotels International financial
statements:
For this analysis, we are going to use the theoretical tax rate, which is the tax rate
established by the tax law corporation (25%).
4.4.3. Cost of Equity (Ke)
The cost of equity is an implied cost or an opportunity cost of capital. It is the rate of
return shareholders require, in theory, in order to compensate them for the risk of
investing in the stock; it is calculated using the Capital Asset Pricing Model (CAPM)
which equates rates of return to volatility (risk vs. return).
Data expressed in thousand €
Gross Financial debt 2019 2.163.993
Financial expenses 2019 87.203 Cost of debt (Kd) 4,03%
Kd = Financial Expenses
(Financial debt n-1 + financial debt n)/2
* (1 –t)
Therefore, the effective cost of debt would be = 4,03% * (1-25%) = 3,02%
Table 4. Calculation of cost of debt
Own elaboration from the data provided by the Financial Statements of Melia
21
Under the CAPM Model, we assume a perfect competition market and therefore, the
interaction of supply and demand will determine the price of the assets. As we know, the
higher the risk, the higher the return, consequently, if we are able to measure and grant
values to the level of risk assumed, we could know the exact potential return of the
different assets. (Juste, 2019)
The total risk of a financial asset can be divided in:
- Systematic risk: Is the risk derived from the general economic uncertainty, it
depends on the market in which the financial asset is listed and therefore it cannot
be controlled by the company. (Ucha, Economipedia, 2019)
- Non – systematic risk: Is the intrinsic risk of the financial asset and it can be
controlled through diversification, understood as, the combination of different
assets that allow compensation in adverse movements with the assets that make
up a portfolio. (Ucha, 2019)
However, the CAPM Model only takes into account the systematic risk.
This model interprets, therefore, that in a market in equilibrium, the profitability that an
investor expects to obtain from an asset is equal to the value which would be obtained
from a risk-free investment plus a compensation for the systematic risk that it has to bear.
This compensation, in turn, is given by the market risk premium multiplied by the beta
coefficient.
Mathematically expressed as:
Where:
- Rf: The risk-free rate
- Rm: Expected market return
- Rm – Rf: Market risk premium
- βi: Beta (systematic risk factor)
Ke = Rf + (Rm – Rf) βi
22
Determination of the risk-free rate (Rf)
The risk-free rate refers to the return obtained by investing in a certain financial asset
which in principle, doesn’t have any risk of default, having a guaranteed return and being
a secured financial product.
The risk-free rate is therefore, the return that can be earned by investing in a risk-free
security. When we talk about the risk-free profitability of financial products, we talk about
those coming from public institutions, to which this term is usually associated, such as
treasury bills or government bonds, since they are considered to be the safest financial
products in the market. (Pablo Fernández, 2019)
It is true, that many investors mention that the risk-free return is tenuous is many
countries, but in general, the risk is so minuscular that we could refer to it as a risk-free
return.
For the valuation of Melia Hotels International, the most accurate measure would be to
use the Spanish bond. But, the rate of return is lower than its real value due to the
quantitative easing policy made by the European Central Bank on 2012. Therefore, I find
this measure unreliable.
It is true that several experts, such as Pablo Fernández, have mentioned that the risk-free
rate is the one obtained through the purchase of the actual bond, and qualifies as an error
to use a historical average.
According to the statements mentioned before, I have considered the best option to use
the risk-free published by eminences of business valuation such as Pablo Fernández as
the most accurate value.
It is also important to mention, that the time horizon matters, thus the risk-free rates in
valuation will depend upon when the cash flow is expected to occur and will vary across
time. Meaning that if your cash flow stretch out over the long-term, your risk free rate
has also need to be long-term.
23
For this reason, I have looked at the evolution of the Spanish yield curve as shown below.
As we can appreciate on the graph, the annual growth of the interest rate is almost near
to 0%. Additionally, neither the ECB nor the IMF have mentioned a change in the policy
of interest rates. Which makes me believe that the spot value of the risk-free is also valid
for the long-term as we won’t suffer an increase of interest rates.
Finally, we can conclude, that based on the information provided, the risk-free rate of
Spain for the following years will be:
Determination of the market return (Rm) and the market risk premium (Rm – Rf)
The market risk premium is part of the CAPM which analysts and investors use to
calculate the acceptable rate of return for an investment. (Pablo Fernández, 2009)
The market risk premium (MRP) is defined as the additional return an investors will
receive, or more precisely, expects to receive, from holding a risky market portfolio
instead of a risk-free asset. (Pablo Fernández)
It is considered to be one of the most controversial financial parameters, mainly because
the term designates four different concepts and realities. (Corporatefinanceinstitute, 2019)
Rf = 1,3%
Table 5. Evolution of the Spanish yield curve
Own elaboration from the data provided by Thomson Reuters
24
- Historical market risk premium – The difference between the historical return of
the stock market and the fixed income. Which will produce the same result for all
investors as the value’s calculation is based on past performance
- Expected market risk premium – Is the expected future performance of the fixed
income exchange and is therefore based on the investor’s return expectation
- Required market risk premium - Refers to the minimum amount investors should
accept.
- Implicit market risk premium – Is the required market risk premium that
corresponds to the market price.
It is true that at the moment, there is no consensus on the magnitude of the risk premium
or on how to calculate it due to the heterogeneous expectations of investors.
Nevertheless, the theoretical formula we have in order to estimate is as follows:
According to Pablo Fernández the result should oscillate between the 3% and 10%.
In order to estimate the MRP I have considered the most accurate way to look at one of
the analyst researches. Specifically, Pablo Fernandez’s one, which estimates the rate by
making an average of the results obtained by asking many professionals of the sector. As
mentioned before, investors have heterogeneous expectations, therefore, I consider
acceptable and reliable to use an average of those expectations.
Based on the formula mentioned above, the expected rate of return would be:
Determination of Beta (β)
The CAPM adjust for company-specific risk through the use of beta, which measures how
a company’s stock price responds to movements in the overall market; helping investors
to understand whether a stock moves in the same direction as the rest of the market, and
how volatile it is compare to the market. (Pablo Fernández, 2008)
MRP = Expected rate of return (Rm) – Risk-free rate (Rf)
MRP = 6,3%
Rm = MRP + Rf Rm = 6.3% + 1.3% Rm = 7,6%
25
Therefore, it describes the activity of a security’s returns responding to swings in the
market. It is calculated by dividing the product of the covariance of the security’s returns
and the market’s returns by the variance of the market’s returns over a specific period.
(Kenton, Investopedia, 2020).
Where:
- Re: The return on an individual stock.
- Rm: The return on the overall market.
- Covariance: How changes in a stock’s returns are related to changes in the market’s return.
- Variance: How far the market’s data points spread out from their average value.
If a stock has a beta of 1.0 it indicates that its price activity is strongly correlated with the
market. Adding a stock to a portfolio with a beta of 1.0 doesn’t add any risk to the
portfolio and consequently doesn’t increase the likelihood that the portfolio will provide
an excess return.
A beta value of less than 1.0 means that the security is theoretically less volatile than the
market, meaning the portfolio is less risky with the stock included than without it.
A beta that is greater than 1.0 indicates that the security’s price is theoretically more
volatile than the market. This indicates that if we add this stock to the portfolio both the
risk and the return of the portfolio will increase.
The beta coefficient theory assumes that stock returns are normally distributed from a
statistical perspective. However, financial markets are prone to large surprises, so in
reality, returns aren’t always normally distributed.
Since beta statistic is calculated using historical data points, it also becomes less
meaningful for investors looking to predict a stock future’s movements. Additionally, it
doesn’t factor any new information on the market becoming less useful for long-term
investments.
For the valuation of Melia Hotels International, we could use the beta of the company
given that it is a public company. But, based on the aforementioned, individual company
Beta coefficient (β) =
Covariance (Re, Rm)
Variance (Rm)
26
betas can at any point in time be heavily influenced by no repeated events; therefore, I
have considered a more precise method to use an industry peer median rather than the
historically measured for Melia Hotels International.
In order to estimate the beta for Melia Hotels International through this method, we should
first estimate a beta for each company in the peer group and then convert each beta into
unlevered beta. Once collected all the betas, we would take the median to ensure that the
current beta is representative of the risk. Nevertheless, in order to simplify the method I
have decided to look at the sector beta calculated by one of the eminences of company
valuation. (Damodaran, 2020)
But, if the company has debt, it’s not fair to ignore that altogether in the calculation, as
debt does create an additional risk and we need to account for it. Therefore, once we have
the unlevered beta of the hospitality industry, we are now going to re-lever it to calculate
the approximate levered beta for Melia Hotels International, in order to determine the
company’s true, inherent business risk, based on the comparable.
We are going to re-lever Beta for Melia Hotels International according to the following
formula:
Following this structure, the levered beta of Melia hotels International would be:
Unlevered Beta 0,64%
Tax rate 25%
Financial debt 1.991.354
Equity 1.825.417 Levered Beta 1,16%
After determining the last variable of the cost of equity, we can now compute Ke
Unlevered Beta (β) = 0,64%
Ke = Rf + (Rm – Rf) β 1,30 + (7,6 – 1,3) * 1,16 = 8,61%
Levered Beta = Unlevered Beta * (1+ (1-Tax rate)*(Debt/Equity))
Table 6. Calculation of the levered beta
Own elaboration
27
For Melia Hotels International I have also considered relevant to include a company risk
premium as I perceive a higher overall risk for Melia than for the rest of the sector. This
additional risk can be illustrated in how the company has evolved in recent years, with a
negative growth as well as a decreasing market capitalization, while the sector has been
in a continuous growth as mentioned in the sector analysis, even Gabriel Escarrer
recognized an evolution in the stock market which is “extremely negative”
(Funds&Markets, 2019).
Melia Hotels International is therefore being punished in the stock market, which could
be mainly caused by the decreasing activity in the Caribbean and the insecurity of Mexico.
Additionally, it has also been affected by the lower arrival of tourists in the national
market, specifically, in the Balearic or Canary Islands caused by the increasing
competition from countries like Turkey and Egypt. (Velázquez, 2019). Not to mention the
increasing competition coming from new platforms such as Airbnb, which is changing
consumer trends and it is highly affecting the urban hotel industry.
Based on the aforementioned, and knowing that 38% of Melia’s profit margin comes from
Spain and 40% from Americas, I have considered appropriate to include a company risk
premium of 1% in order to represent the additional risk of the company.
4.4.4. Capital structure
The capital structure is the particular combination of debt and equity used by a company
to finance its overall operations and growth. The most accurate value would be to use the
market value of both, we are going to use the market capitalization of Melia Hotels
International in order to determine the value of equity (1.825.417) at December 2019.
(Investing.com, 2020) .However, for the value of debt we are going to use its book value,
as most of its debt is financial debt (96%) and only 4% is given by obligations and other
negotiable securities. (CNMV, 2019).
Ke = 8,61% + CRP = 8,61% + 1% = 9,61%
28
Thousands of € Proportion
Equity 1.825.417 47,82%
Financial Debt 1.991.354 52,18%
Total 3.816.771 100%
4.4.5. Calculation of WACC
Once we have obtained all the variables necessary concerning the calculation of the
Weight Average Cost of Capital, we are now going to determine the discount rate we are
going to use for the expected free cash flows of Melia Hotels International as to obtain
the final value of the company.
4.5. TERMINAL VALUE
When building a DCF Model, as mentioned before, there are two major components
regarding the time horizon: The forecast period: For which we have considered a five
year period, a reasonable amount of time to make detailed assumptions and the terminal
value, which is the estimated value of a business beyond the explicit forecast period.
The terminal value, is a critical part of the financial model as it typically makes up a large
percentage of the total value of the business. In order to calculate it, there are two main
approaches: (Corporatefinanceinstitute, 2019)
- Exit Multiple: Which assumes the business will be sold for a multiple of some
metric based on currently observed comparable trading multiples for similar
business (e.g. EBITDAx)
- Perpetual growth: Also known as Gordon-Saphiro model, which assumes the
business will continue to generate free cash flows at a normalized state forever
(perpetuity).
WACC = 3,02% * 52,18% + 9,61% * 47,82% = 5,69%
Table 7. Capital Structure
Own elaboration from data provided by the Financial Statements of Melia and
Investing.com
29
For the valuation of Melia Hotels International, we are going to calculate through the
Gordon-Saphiro model from which we can obtain the value of the perpetuity through the
last free cash flow estimated, according to the following formula.
Where:
- FCFn: Last estimated Free Cash Flow
- WACC: Weight Average Cost of Capital
- g: Terminal growth rate
The terminal growth is the rate at which a firm’s expected free cash flows are assumed to
grow indefinitely. In other words, we will assume that firm’s free cash flow will continue
to grow at the terminal growth rate, rather than projecting the free cash flow for every
period in the future.
It is very important to use the correct terminal growth rate. According to several analysts,
it should be less or equal to the country’s GDP growth rate, the rate of inflation or
something else like that. Otherwise, eventually the company’s FCF will exceed the GDP
of the entire country, which wouldn’t make sense.
For the valuation of Melia Hotels International, I am going to use as a reference the
Spanish GDP which according to Banco de España is of 2% for 2019 and have an
expected GDP of 1,7%, 1,6% and 1,5% for the years 2020, 2021 and 2022 respectively.
(Banco de España, 2020)
However, in order to estimate the terminal value of Melia, considering the continuous
decrease of its market capitalization, the increasing competition and the uncertainty that
is facing nowadays, in order to be conservative, I have decided to use a terminal growth
rate of 0.5%. At the same time, as Melia operates in a mature market and we are not
expecting it to have an exponential growth, conversely, we are actually considering that
it will stay more less the same, I find this rate the most accurate one.
Once applied the formula showed before, we obtain the following terminal value:
Terminal Value = FCFn * (1+g)
WACC - g
Terminal Value = 3.016.842€
30
4.6. RESULT OF THE VALUATION OF MELIA HOTELS
INTERNATIONAL USING THE DCF MODEL
Following the assumptions taken for the valuation of Melia, we have come to the
following free cash flow projections for Melia Hotels International as for the period 2020-
2024 as well as its terminal value.
Once obtained the free cash flows, we then have to the discount them by the Weight
Average Cost of Capital (WACC) previously calculated, in order to obtain its Enterprise
Value:
The enterprise value is the value of a company’s core business operations that is available
to all shareholders (debt and equity holders).
We are now going to calculate the equity value, which is the total value of a company
that is available to equity investors.
Data in thousand € 2020 2021 2022 2023 2024
Free Cash Flow 146.031 205.970 205.925 205.761 205.458
Terminal Value 3.978.525
Data in thousand € 2020 2021 2022 2023 2024
Free Cash Flow 146.031 205.970 205.925 205.761 205.458
WACC 5,69%
NPV FCF 817.680 138.169 184.389 174.424 164.902 155.795
Terminal Value 3.978.525
WACC 5,69%
g 0,5%
NPV TV 3.016.842 3.016.842
Enterprise Value 3.834.523
Table 8. Free Cash Flow and Terminal Value of Melia
Own elaboration
Table 9. Enterprise Value of Melia Hotels International
Own elaboration
31
In order to calculate it, we are going to take the enterprise value and we are going to
subtract the net debt which in the case of Melia is calculated with the following structure:
+ Long-term debt 799.135
+ Short-term debt 100.516
+ Liabilities for leases 1.264.282
+ Other liquid liabilities 244.988
-Other liquid assets 88.623 -Cash 328.944
= Total Net Debt 1.991.354
Once we have calculated the net debt we are now going to compute in order to get the
equity value:
4.7. SENSITIVITIES
In this section, we will be introducing changes in the initial valuation of Melia Hotels
International, with the aim of observing the variations that may exist in it. In order to do
so, I have considered reasonable to make this sensitivity analysis on the most cr itical
variables of the valuation, which in this case are, the terminal growth rate (g) and the
Weight Average Cost of Capital (WACC).
The main reason for this sensitivity analysis is that we should not take the final enterprise
value as a fixed figure, since this value has been calculated through assuming several facts
which have been explained throughout the whole project.
Based on the aforementioned, in order to show an interval of the estimated value of Melia,
different scenarios will be made in which both, the value of the terminal growth (g) and
the value of WACC will be a calibration of the considered ones, while keeping all the
other parameters constant.
Equity Value = 3.834.523 – 1.991.354 = 1.843.169
Table 10. Net debt of Melia
Own elaboration from data provided by the Financial Statements of Melia
32
According to the scenarios contemplated in the table above, we can see that the most
pessimistic scenario occurs when the WACC is 6,69% and g is 0,4%, obtaining an
enterprise value of 3.167.224. On the other hand, the most optimistic occurs when the
WACC is 4,69% and g is 0,6% with an enterprise value of 4.860.136
However, the scenarios in line with our valuation are the ones highlighted in green, and
will therefore be the ones considered in order to establish our valuation interval.
5. VALUATION METHOD: TRADING MULTIPLES
As previously mentioned in the conceptual framework of this project, various methods
can be used in order to calculate the intrinsic value of a company, and consequently it is
very frequent to complement each other.
We have based this project on the discounted cash flow method. However, in this section
we are going to complement the preceding valuation by obtaining the value of Melia
Hotels International using the trading multiples method, which is based on the analysis
of ratios between companies among the same sector.
In order to calculate the value of Melia through this method, we first need to determine
which companies are going to be used in order to calculate the ratios and thus be able to
carry out the valuation.
The selection of the comparable group is one of the most important tasks in this method.
Therefore, it is very relevant that the companies that are compared keep similarities
between each other.
WACC
3.834.523 4,69% 5,19% 5,69% 6,19% 6,69%
TV
(g)
0,40% 4.665.173 4.173.359 3.774.548 3.444.648 3.167.224
0,45% 4.712.190 4.210.314 3.804.249 3.468.957 3.187.425
0,50% 4.760.328 4.248.058 3.834.523 3.493.693 3.207.952
0,55% 4.809.630 4.286.615 3.865.385 3.518.868 3.228.813
0,60% 4.860.136 4.326.012 3.896.853 3.544.493 3.250.016
Valuation interval = 3.468.957 – 4.286.615
Table 11. Sensitivities scenarios
Own elaboration
33
Melia Hotels International, as mentioned before, operates in different ways and through
various brands of different ranges, therefore, the most accurate method would be to look
for comparable companies depending on each business line. However, given the limited
information we have access to and the greater complexity this would entail, we are going
to use the same companies that Melia uses to define its main competitors in order to
achieve a value as accurate as possible.
Among its competitors, I have decided to choose NH Hotels, Accor, Wyndham Hotels &
Resorts, Hyatt Hotels and Marriott as the group of comparable companies.
- NH Hotels: Spanish multinational hotel chain founded in 1978. Its main
headquarters are stablished in Madrid and it is listed on the Madrid stock
exchange. NH Hotels mainly operates in Europe and Latin America through six
different brands, over 400 establishments and 60.000 rooms. (NH Hotel Group,
2020). With 1.708.078 thousand € total revenues in 2019 and a net income of
98.851 thousand €. (CNMV, 2019)
- Accor: French group founded in 1967, headquartered in Paris and listed on the
Euronex Paris Market, it is present in more than 95 countries with more than 4.200
hotels. (Accor Hotel Group, 2020). Its total revenue for 2019 accounted for
4.049.000 thousand € and a net income of 624.000 thousand €. (Accor, 2019)
- Wyndham Hotels & resorts: International hotel & resort chain based in the United
States, founded in 1981 and listed in S&P500, it has 9.280 hotels under
management and operates under 21 different brands around 75 countries.
(Wyndham Hotels & Resorts, 2020). It had a total revenue of $1.686.000 thousand
for 2018 and a net income of $162.000. (Unites States securities and exchange
commssion, 2019)
- Hyatt Hotels: American international hotel company founded in 1657, it has more
than 640 hotels, 165.000 rooms and operates in 52 different countries under 10
different brands. (Hyatt Hotels, 2020). In 2018 it amounted for a total revenue of
4.685.000 thousand and a Net income of 250.000 thousand. (United states securities
exchange commission, 2018)
- Marriott: International Hotel Company founded in 1993 in the United Sates, it has
under its management more than 4.200 hotels distributed through 79 countries. Its
operations are mainly based in America. It amounted for a total revenue in 2019
34
of 20.972.000 thousand and a net income of 1.800.000 thousand. (Marriott Hotels,
2020)
Once determined the group of comparable companies we are now going to make the
valuation of the company through two different ratios (MarketScreener, 2020).
The PER is a ratio that relates the price of a company’s share to the revenue that it
generates. It represents a measure of quality of investors on the benefits of a certain
company and is the most widely used on the stock market.
𝑃𝐸𝑅 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
As we can observe on the table above, through the price-earnings ratio we obtain a
valuation interval of (3.185.556 – 4.567.031), I have decided not to take the year 2018
into account as it doesn’t have the effects of IFRS 16 included.
Company 2018 2019 2020 2021
NH Hotels 12.8x 20.4x 31.1x 17.4x
Accor 4.88x 19.4x 42.8x 22x Wyndham 28x 38.8x 13.1x 10.2x
Hyatt Hotels 10.1x 12.4x -111x 73.4x
Marriott 20.2x 39.9x 43.3x 15.8x
Average 15.19x 26.18x 32.58x 27.76x
Valuation 2018 2019 2020 2021
Average 15.19 26.18 32.58 27.76
Net Income of Melia 144.236 121.679 140.179 144.022
EV of Melia 2.190.945 3.185.556 4.567.031 3.998.050
Net Debt of Melia 529.020 1.991.354 2.049.034 2.047.248
Equity Value Melia 1.661.925 1.194.202 2.517.997 1.950.802
Table 12. Calculation of PER
Investing.com and own elaboration
Table 13. EV and Equity Value of Melia through PER
Own elaboration
35
As we can see, the valuation range obtained through the DCF Model (3.468.957 –
4.286.615) is within the PER valuation interval.
On the other hand, we are going to calculate the EV/EBITDA (Enterprise Value/
EBITDA) ratio, this multiplier helps us obtain the market value of the assets of a company
regardless of how it is financed. Therefore, it determines whether the company
incorporates greater or lesser value than the one directly related to the resources
generated. Accordingly, whether the company’s management is higher or lower than the
results obtained.
However, based on this ratio, the valuation range we obtain is higher than the one obtained
through the two methods previously used, the range being (5.262.177 – 5.824.252). The
EV/EBITDA multiple is a control measure that contrast the company’s cash generation
(EBITDA) with respect to its valuation and should therefore be very similar in companies
within the same sector. However, this difference could be explained as follows:
Company 2020 2021
NH Hotels 5.38x 5.18x
Accor Hotels 11.6x 16.9x
Wyndham Hotels 9.82x 8.55x
Hyatt Hotels 12.9x 9.59x
Marriott 17.7x 11.3x
Average 11.48x 10.3x
Valuation 2020 2021
Average 11.48 10.3 EBITDA of Melia 507.339 510.891 EV of Melia 5.824.252 5.262.177 Net Debt of Melia 2.049.034 2.047.248 Equity Value of Melia 3.775.218 3.214.929
Table 14. Calculation of EV/EBITDA
Investing.com and own elaboration
Table 15. EV and Equity Value of Melia through EV/EBITDA
Own elaboration
36
Regarding the American chains, it is normal for their EV/EBITDA multiple to be much
higher than the European ones, as it happens with many other sectors and it seems to be
a bubble indication. However, I am more shocked by the difference in EV/EBITDA of
Accor which is a French company, which I think is because the EVs that appear in the
listed companies could be overvalued by the enormous liquidity that there is/was in the
markets due to a simple supply and demand issue, there is a lot of demand to invest, but
little supply which causes the price of companies to rise “artificially” in the markets,
which is why it must be corrected with an ad hoc analysis as it has been done.
6. CONCLUSION
After carrying out the valuation of Melia Hotels International I have reach to the
following conclusions.
- Developing the valuation of a company is a complex process due to the many
variables that make up the valuation methods, in addition to the fact that these in
many cases are based on assumptions.
- Although many analysts and authors refer to the DCF method as the most
complete, we cannot conclude that there is actually a better method. Instead,
depending on the circumstances or factors that influence a specific company, we
should consider the most appropriate method.
- We have observed that in none of the cases the value that is obtained through any
of the exposed methods constitutes the exact value of the company. In each and
every model, the idea is to try to estimate the value of a company. Therefore, none
of the values provided by each method constitute categorical statements regarding
the value of the company.
- The valuation of a company should therefore be taken as a guideline value.
Accordingly, the results obtained by any valuation method should provide a range
of values between which the market price of a company will fluctuate.
- The DCF model is very susceptible to giving very different values depending on
the hypotheses used, therefore we recognize that in order to use this method and
consider it efficient, a full knowledge of the business and its future plan is
necessary in order to make the most accurate assumptions for its future
projections.
37
- Based on the sensitivities table, we have seen that the WACC directly influences
the value of the company, the higher the discount rate the lower the current value
of the future cash flows and therefore, the lower the value of the company.
Keeping the same forecast in the variables and slightly changing the discount rate
leads to very disperse results.
- The combination of the different valuation methods allows us to achieve more
precise results than the isolate application of each one of them.
7. TABLE INDEX
Table 1. International tourism evolution……………………………………………………8
Table 2. Purposes of visit……………………………………………………………………9
Table 3. Outbound tourism by region……………………………………………………...10
Table 4. Calculation of cost of debt………………………………………………………..20
Table 5. Evolution of the Spanish yield curve…………………………………………….23
Table 6. Calculation of the levered beta…………………………………………………..26
Table 7. Capital Structure………………………………………………………………….28
Table 8. Free Cash Flow and Terminal Value of Melia……………………………………30
Table 9. Enterprise Value of Melia Hotels International…………………………………..30
Table 10. Net debt of Melia………………………………………………………………..31
Table 11. Sensitivities scenarios…………………………………………………………...32
Table 12. Calculation of PER……………………………………………………………...34
Table 13. EV and Equity Value of Melia through PER……………………………………34
Table 14. Calculation of EV/EBITDA…………………………………………………….35
Table 15. EV and Equity Value of Melia through EV/EBITDA…………………………..35
38
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42
9.
AP
PE
ND
IX
31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021 31/12/2022 31/12/2023 31/12/2024
mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
2.419.686 2.540.562 2.473.950 2.760.640 4.114.756 4,49% 4.113.543 4.112.752 4.112.375 4.112.402 4.112.825
61.036 60.769 60.714 67.999 72.267 72.267 72.267 72.267 72.267 72.267
139.091 141.136 135.900 149.437 116.267 1,50% 118.011 119.781 121.578 123.402 125.253
1.578.997 1.693.393 1.649.614 1.856.801 1.923.267 0,50% 1.932.883 1.942.548 1.952.260 1.962.022 1.971.832
132.186 135.941 122.334 239.781 297.298 297.298 297.298 297.298 297.298 297.298
508.376 509.323 505.388 446.622 454.402 -2,77% 441.829 429.604 417.716 406.158 394.920
1.251.255 1.251.255 1.251.255 1.251.255 1.251.255 1.251.255
743.343 782.908 746.857 714.519 640.904 -3,64% 610.179 629.552 648.765 667.832 686.765
81.460 63.954 53.255 26.492 29.260 -22,58% 51.253 51.611 51.973 52.337 52.703
2,8% 4,7% 3,5% 2,8% 1,4% 1,6%
254.488 275.269 258.072 249.076 194.077 -6,55% 246.562 248.288 250.026 251.776 253.538
13,6% 14,6% 15,3% 13,7% 13,6% 10,8%
58.778 76.910 103.645 126.049 88.623 10,81% 90.494 91.127 91.765 92.407 93.054
5,0% 3,4% 4,3% 5,5% 6,9% 4,9%
348.617 366.775 331.885 312.902 328.944 -1,44% 221.871 238.526 255.002 271.313 287.470
3.163.029 3.323.470 3.220.807 3.475.159 4.755.660 10,73% 4.723.722 4.742.304 4.761.140 4.780.234 4.799.590
1.314.549 1.563.613 1.522.757 1.384.204 1.286.030 1.286.030 1.286.030 1.286.030 1.286.030 1.286.030
39.811 45.940 45.940 45.940 45.940 45.940 45.940 45.940 45.940 45.940
1.234.223 1.414.725 1.343.369 1.194.028 1.118.411 1.099.911 1.096.068 1.091.856 1.087.224 1.082.112
40.515 102.948 133.448 144.236 121.679 140.179 144.022 148.234 152.866 157.978
974.684 881.352 891.410 1.383.885 2.699.654 2.711.641 2.723.808 2.736.157 2.748.692 2.761.414
511.237 584.684 653.928 734.910 799.135 1,50% 811.122 823.289 835.638 848.173 860.895
252.263 76.402 25.567 402.370 384.544 384.544 384.544 384.544 384.544 384.544
1.264.282 1.264.282 1.264.282 1.264.282 1.264.282 1.264.282
161.715 184.689 167.107 189.312 221.888 221.888 221.888 221.888 221.888 221.888
22.974 -17.582 22.205 32.576
49.469 35.577 44.808 57.293 29.805 29.805 29.805 29.805 29.805 29.805
-13.892 9.231 12.485 -27.488
873.796 878.505 806.640 707.070 769.976 726.051 732.466 738.953 745.512 752.145
399.424 290.502 281.092 166.592 100.516 2,00% 102.526 104.577 106.668 108.802 110.978
397.344 459.663 443.274 474.009 424.472 440.056 443.137 446.239 449.362 452.508
24,3% 22,9% 25,5% 23,5% 25,9% 23,6%
77.028 128.340 82.274 66.469 244.988 183.468 184.753 186.046 187.348 188.660
10,1% 4,4% 7,1% 4,4% 3,6% 13,6%
3.163.029 3.323.470 3.220.807 3.475.159 4.755.660 10,73% 4.723.722 4.742.304 4.761.140 4.780.234 4.799.590
Derechos de uso
Pasivos por arrendamientos
Acreedores comerciales
Otros pasivos líquidos
Total pasivo y capital propio
% s/ventas
% s/ventas
Deudas financieras a LP
Otros pasivos fijos
Provisiones
Deudas financieras
Pasivo líquido
Change in provisions
Pasivos por impuestos difereridos
Change in deferred taxes
Total activo
Fondos propios
Capital suscrito
Pasivo no corriente
Reservas
Beneficio neto
Activo circulante
Existencias
Deudores
Otros activos líquidos
Tesorería
% s/ventas
% s/ventas
% s/ventas
Inmovilizado
Inmovilizado inmaterial
Inmovilizado material
Cuentas Consolidadas
Otros activos fijos
Fondo de comercio
Activos por impuesto diferido
CAGR
Historical Forecast
Balance de situación
43
31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021 31/12/2022 31/12/2023 31/12/2024
mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
1.738.207 1.801.962 1.885.166 1.831.315 1.800.748 1.813.353 1.826.047 1.838.829 1.851.701 1.864.663 0,70%
1.738.207 1.801.962 1.885.166 1.831.315 1.800.748 1.813.353 1.826.047 1.838.829 1.851.701 1.864.663 0,89%
-214.823 -222.783 -215.232 -190.785 -199.035 -208.935 -210.398 -211.871 -213.354 -214.847
% s/ revenues 11,5% 12,4% 12,4% 11,4% 10,4% 11,1% 11,5% 11,5% 11,5% 11,5% 11,5%
1.523.384 1.579.179 1.669.934 1.640.530 1.601.713 1.604.418 1.615.649 1.626.958 1.638.347 1.649.816
-1.230.306 -1.293.553 -1.359.681 -1.314.003 -1.123.803 -1.097.079 -1.104.758 -1.112.492 -1.120.279 -1.128.121
% s/ revenues 60,5% 70,8% 71,8% 72,1% 71,8% 62,4% 60,5% 60,5% 60,5% 60,5% 60,5%
-129.130 -109.880 -124.305 -120.979 -255.116 -256.902 -258.700 -260.511 -262.335 -264.171
% s/ revenues 14,2% 7,4% 6,1% 6,6% 6,6% 14,2% 14,2% 14,2% 14,2% 14,2% 14,2%
163.948 175.746 185.948 205.548 222.794 250.437 252.190 253.956 255.733 257.524 7,97%
12.165 12.378 31.623 20.543 20.720 23.671 27.041 30.892 35.291 40.317 14,24%
-74.494 -40.536 -41.523 -40.697 -87.203 -87.203 -87.203 -87.203 -87.203 -87.203 4,02%
-62.329 -28.158 -9.900 -20.154 -66.483 -63.532 -60.162 -56.311 -51.912 -46.886 1,63%
101.619 147.588 176.048 185.394 156.311 186.905 192.029 197.645 203.822 210.637 11,37%
-61.104 -44.640 -42.600 -41.158 -34.632 -46.726 -48.007 -49.411 -50.955 -52.659 25,00%
40.515 102.948 133.448 144.236 121.679 140.179 144.022 148.234 152.866 157.978 31,64%
n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d.
n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d.
n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d.
40.515 102.948 133.448 144.236 121.679 140.179 144.022 148.234 152.866 157.978 31,64%
CAGR
Gastos financieros
Dotaciones para amort. Inmov
Otros gastos de explotación
Importe neto Cifra de Ventas
Consumo de mercaderías y de materias
Forecast
Cuentas Consolidadas
Resultado del Ejercicio
Gastos extraordinarios
Resultados actividades extraordinarias
Resultado Actividades Ordinarias
Ingresos extraordinarios
EBT
Impuestos sobre sociedades
Historical
Resultado financiero
Resultado Explotación
Ingresos financieros
Resultado bruto
Cuentas de pérdidas y ganancias
Ingresos de explotación
44
31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021 31/12/2022 31/12/2023 31/12/2024
mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR mil EUR
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
163.948 175.746 185.948 205.548 222.794 250.437 252.190 253.956 255.733 257.524
-98.583 -44.640 -42.600 -41.158 -34.632 -46.726 -48.007 -49.411 -50.955 -52.659
-129.130 109.880 124.305 120.979 255.116 256.902 258.700 260.511 262.335 264.171
-13.892 9.231 12.485 -27.488 0 0 0 0 0
+ Deferred taxes 19.219 -3.975 -95.242 -24.941 0 0 0 0 0
-63.765 246.313 272.909 202.612 390.849 460.613 462.883 465.056 467.113 469.035
0 -227.268 -71.355 -282.937 -296.192 -255.689 -257.909 -260.133 -262.361 -264.594
0 59.044 11.507 66.494 2.694 -58.893 996 1.003 1.010 1.017
-175.594 -50.780 369.518 -1.273.349 0 0 0 0 0
0 -343.818 -110.628 153.075 -1.566.847 -314.582 -256.914 -259.131 -261.352 -263.577
1.314.549 146.116 -174.304 -282.789 -219.853 -140.179 -144.022 -148.234 -152.866 -157.978
0 15.837 13.768 -49.323 1.440.950 -47.522 15.502 15.734 15.970 16.210
- Interest -28.158 -9.900 -20.154 -66.483 -63.532 -60.162 -56.311 -51.912 -46.886
1.314.549 133.795 -170.436 -352.266 1.154.614 -251.233 -188.682 -188.810 -188.808 -188.654
= CF 1.250.784 36.290 -8.155 3.421 -21.384 -105.202 17.288 17.114 16.953 16.804
+ Depreciation/Amortization
Historical Forecast
Cash Flow
EBIT
- Taxes
+ Change in Debt
= CFF
- Rest
+ Provisions
= CFO
- CAPEX
- NOF
= CFI
- Change in Equity